Last week, the Canadian Securities Administrators released an update on a consultation paper regarding the usage of embedded fees for Mutual Funds. CSA has decided on three main proposals:

1. Ban on deferred sales charges (DSC)*, including low-load options;
2. Ban on trailer commissions for discount brokerages;
3. Enhanced conflict of interest disclosure for dealers on existing accounts with embedded fees.

1. Deferred sales charge refers to a commission paid on the purchase of a mutual fund by a client. The sales charge can either be a front-end load (commission is charged up-front) or a back-end load (commission is deferred until sale of the mutual fund). DSC usually implies a penalty schedule for the sale of a mutual fund, with the percentage of the charge decreasing each year. Below is a sample penalty schedule for back-end loads.

End of Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Charge % 5.5% 5.0% 4.5% 4.0% 3.5% 2.5% 1.5% Nil

The reasoning behind the ban, is the DSC effectively keep the investor “locked-in” to a fund company as transferring out of investment funds with that company could cause the investor to incur a hefty fee.

In almost all cases ONELIFE does not use DSC as we believe the best interest of our clients is served by investing in 0% front-end load investments. This means we do not receive any sales commissions unless otherwise discussed with the client. Sales commissions are always negotiated with the client and cannot be added without the client’s approval.

2. A discount brokerage is a stockbrokerage that processes buy and sell orders at a reduced commission rate but does not provide financial advice. Trailing commissions are normally paid to advisors under the embedded fee option in return for providing financial advice for clients. Since discount brokerages do not provide advice, it is unjustifiable they can receive trailer fees. ONELIFE is not a discount brokerage, so this ban does not apply to us or our clients.

3. The last proposal involves several amendments to the regulation surrounding the sale of mutual funds to clients. Although the details are not clearly defined at this point, the changes are intended to address the following:

• conflicts of interest in the best interest of the client;
• put the client’s interest first when making a suitability determination; and
• do more to clarify for clients what they should expect from their registrants.

As is standard procedure at ONELIFE Wealth Management, our firm already meets these requirements. This specifically relates to selling specific investment company products that are chosen through a detailed process to considering risk/return and client objectives, rather than enhanced compensation or sales benefits.

If you have any questions regarding these changes, please do not hesitate to contact your ONELIFE advisor.